Forget the gas tax holiday, why not just go with a windfall profits tax++

[andym]

Hillary Clinton's recent proposal to give a gas tax holiday to consumers is likely to fail even if it could be passed because apparently there is no serious regulation of fuel prices in the USA. Big oil would just increase the price to make up the difference. It appears to me that they do this with impunity already. Why are oil company profits up, when crude oil prices are up? Shouldn't their profits remain relatively stable if they are only passing along the increased charge for crude. Instead they are making record profits. Clearly, they feel that increased oil prices allow them to pass along extra increased prices that not only address the increased price of the raw material. They are at a minimum operating on the idea of profits as a percentage of total revenue. So in a seller's market, there is every reason to keep the price high.

The only way around this problem is to change the rules. One way may be a windfall profits tax (such as that proposed by Clinton) that would cap their profits at some reasonable number depending on the absolute amount of fuel sold (a change in tax law to prevent them from deducting this "loss" due to taxes may be necessary as well). If they exceed this profit number by some unreasonable amount, the tax should increase so as to reduce their overall profits. That might at least end the impetus to tack on extra charges (above cost) when raw material prices spike. Also, there should probably be some provision to allow increased profit if they find ways to cut production costs (instead of just increasing prices).

The downsides of such a tax are a tendency for oil companies to buy foreign petroleum and the loss to stockholders (including those invested through mutual funds etc). However, enough notice should be given to allow fund managers and small investors to transfer their investments before the new law takes effect. The foreign petroleum problem is trickier, but perhaps this would hasten the development of alternate energy sources.

I strongly suspect that both Obama and Clinton would agree on this approach. Why not work together NOW in the midst of the campaign to do something useful for the country and help unify the party. Even if the oil President vetoes it, it would help set the agenda for the next few years.

[rodeodance]

1. She has called for a windfall tax on oil companies to pay for a gas tax holiday.

[andym]

3. I know--it's in my post!

"One way may be a windfall profits tax (such as that proposed by Clinton)"

[TheCowsCameHome]

2. She'd rather buy some cheap votes.

Along with InsaneMcCain.

[Exilednight]

4. There's one little problem.........

The oil companies is going to pass the tax on to the consumer in the form of higher prices. Take it away at the pump, where it's visible, and add it to the cost of production, where it's hidden.

Either way, the end consumer is going to pay the price.

[andym]

5. Not if they get penalized for doing so

The key provision of this should be a sliding scale so as to increase the tax in such a way that increased profit over the determined baseline nets them less money than if they had a "reasonable" profit.
The motivation to increase prices is then lost.

[Exilednight]

6. Define a reasonable profit. The oil companies have earned less than 10% profit.......

of their product. The money is coming off the price which is fueled (no pun intended) by demand.

Percentage wise, they are not making a huge profit. Dollar wise, it's obscene.

[andym]

7. It would have to some absolute number over cost of production per gallon

It would have to some absolute number over cost of production (with corrections made for the cost of the raw materials) per gallon, and that is where economists should be brought in to help decide-- based on current and historical numbers. In other words, they should be allowed to pass along the increased cost of raw materials, but make a flat profit based on their cost of production and the total amount of fuel produced. So (just making up numbers) they may be allowed a 0.40/gallon profit, their cost of production is 0.50/gallon, and the raw material is 1.50/gallon, then gas would cost 2.40/gallon (not taking into account independent gas stations etc). The actual numbers should be decided by actual economic consideration.

In my example, if they exceed their 0.40/gallon profit, the tax rate would kick in to lower the amount they get to less than 0.40/gallon profit. Pretty harsh, but probably necessary.

However, if the cost of production falls due to reasons NOT just due to falling oil prices, the companies should be rewarded. Rewards may also be given for alternate energy development.

[Exilednight]

9. and what happens when that 40 cents is 1% profit? This is the problem you run into. ......

I'm not trying to defend the oil companies, but we have to live in reality. The cap needs to be a percentage, but then the problem you run into is lack of motive to invest in alternative energy sources. All this does is push oil companies to make more people want to use more gas.

My theory is make it a percentage, and you can offset that percentage, if they go over it, by investing in alternative energy.

Example: Law set at 5% maximum profit, but if the oil company makes 10%, then they can come back in under the 5% by investing 5% in alternative energy. If they don't, then they have to pay the tax on the full 10%.

[andym]

10. I suppose if it actually would make investing in an oil company less than a savings account then

I suppose if the point was reached it actually would make investing in an oil company less valuable than a savings account then, then we would need to guarantee a minimum percentage return slightly more than a more conservative investment. Of course, we could combine a flat rate system with the need to protect a minimum profit too-- the flat rate holds until the minimum is reached, then the minimum takes over.

[doc03]

8. Exactly, there is no law against making a profit

and if you put a windfall tax on the oil companies the first thing you will see is gas lines. The oil companies are not evil they are us stock holders, I'm not rich but a portion of my 401k and millions of other peoples are invested in oil stocks. If you want to do something create a program similar to the moon landing goal of JFK. The government should invest in an all out program to totally eliminate the need for foreign oil by 2010. Give a $3-5000 tax credit for hybrid cars to make them competitive with gas only models. The government should give a tax credit for installing wind, solar and geothermal heating systems. The gas tax holiday and the windfall tax are nothing but election year gimmicks.